Published: 1995

Our Members Write
Should a Minority of Renters Overrule Co-op Shareholders?

Beverly O'Reilly, communications chairperson at the Jaxboro co-op in Queens, has sent the following letter to alert CNYC to problems faced in her cooperative as the rights of renters have come in conflict with the needs of shareholders.

The Rent Stabilization law has had a devastating effect on New York City cooperatives and condominiums, taking decision-making power out of the hands of responsible shareholders and putting it into those of rental tenants. At the Jaxboro, a 144-unit co-op with 43 rent stabilized tenants, we have witnessed first-hand the crippling financial impact that rent regulation can have on this type of housing.

The Rent Stabilization Law was enacted many years ago -- before the great increase in the number of co-ops and condos -- to protect rental tenants from unsubstantiated rent increases and service reductions by landlords. In non-eviction buildings where a portion of residents are still living in rent stabilized units, however, the law gives priority to rental tenants over the decisions of the shareholders, who are in the majority.

As a consequence, boards of directors can be legally prevented from changing, reducing or eliminating a building service that they consider no longer needed or too costly to maintain. If rent stabilized tenants want the service continued -- particularly since the cost is not their responsibility -- their "rights" take priority over the business judgment of the board.

Should the board decide to pursue the reduction of this service in the interest of cutting costs and balancing the budget, it must then undergo a lengthy filing and appeal process with the state Division of Housing and Community Renewal (DHCR), Office of Rent Administration, where the board may or may not be granted permission to eliminate or reduce the service.

If the board attempts to make the change without DHCR approval, the state agency has the right to impose severe penalties on the owner of the rent stabilized units (generally the former sponsor), resulting in a rollback of rents to a prior position, as well as a rent freeze. This puts the landlord in a difficult position, where he must demand that the co-op reverse its decision and restore the altered services.

At our co-op, union labor costs were absorbing 28% of the budget. The board attempted to reduce those costs by eliminating a portion of the doorman service -- the midnight-to-8 AM shift, which cost the co-op more than $54,000 a year including wages, benefit package, workmen's compensation, payroll taxes, and other employee-related costs.

A careful survey had revealed that this shift, provided in the building since long before the 1984 conversion, was underutilized, with practically no rent stabilized tenants using it at all (most of them are older people). The board also found that none of the 12 neighboring buildings had doormen, daytime or nighttime. As a result, the board felt it could better use those funds elsewhere.

Yet according to the Rent Stabilization Law, this service could not be removed without DHCR approval and, most likely, without a rent reduction for the rent stabilized tenants. In addition, the tenants were entitled to challenge the request -- which they did, on the grounds that the absence of the doorman during the midnight hours jeopardized their security. (The doorman was never a security guard. He simply opened and closed the main door, and during the quiet midnight hours he was usually found asleep in the lobby.)

Based on the challenge, the DHCR denied the co-op's request. It suggested the building install a security system, and stated that the landlord could then refile for permission to substitute the system for the doorman service. There was, of course, no guarantee that such a request would be granted, but the board acted immediately and presented plans for installation of a security system. If the plans survive another challenge by the tenants, the DHCR may grant the request -- but still determine that a rent reduction is required due to the loss of service.

In addition, the landlord of Jaxboro's rent stabilized units requires a commensurate reimbursement from the co-op for any rent loss from this action. That means that if the DHCR approves the service reduction, the shareholders will have to pay for their rent stabilized neighbors' rent cuts -- even though they won't have a midnight doorman, either!

In a building that is no longer under sponsor control, it seems patently unfair for regulations pertaining to rent stabilized tenants in sponsor-owned units to have priority over the decisions of shareholders. After all, the shareholders have made significant investments in the building, they shoulder the heavy responsibility of managing the corporation, and they are personally affected by maintenance increases when costs run over budget.

We are not suggesting that controls over rents for rent stabilized units be removed. We ask that rent stabilization regulations that interfere with the co-op's management of its own business affairs be lifted. These onerous regulations favor non-shareholders at the expense of the majority of residents.